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BAE - Dividend raised on profit growth

Excluding the impact of currency movements, full year underlying sales rose 5% to £21.3bn

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Excluding the impact of currency movements, full year underlying sales rose 5% to £21.3bn. That reflected growth in Electronic Systems and Air and Maritime which was partially offset by declines in Cyber & Intelligence and Platforms & Services.

Underlying operating profits were £2.2bn, up 13% excluding the impact of exchange rates. This was driven by growth across all segments except Air, which saw profits decline due to increased investment.

The group's expecting sales growth of 2-4% in 2022, with 75% of that estimate already accounted for in the order book. Underlying operating profits are expected to rise between 4% and 6%.

A final dividend of 15.2p per share will bring the total for the year to 25.1p per share.

The shares rose 5.5% following the announcement

View the latest BAE share price and how to deal

Our view

Given BAE is in the defence business, the current crisis is having a positive effect on the share price. It helps that despite muted air travel, which makes it harder to sell BAE's commercial flight control products, BAE's had a strong year.

The group's primarily in the business of manufacturing and delivering heavy duty military equipment - think fighter jets and aircraft carriers. A significant portion of existing defence contracts are deemed critical, and that gives BAE great visibility over its multi-billion pound revenues. Now that the US and UK have confirmed their commitment to maintaining defence spend, that path is even clearer.

The reliable revenue streams that carried BAE through the pandemic meant the firm could focus on future growth rather than survival. The group used the opportunity to buy US-based Military Global Positioning System and Airborne Tactical Radio businesses. The GPS business, which protects against navigational interference, cost $1.9bn while the communications purchase was worth $275m. The two compliment the group's existing navigation and communication offerings and improved sales in the first half of the year. All of this makes the purchase a worthwhile endeavour in our view.

BAE's also in the process of beefing up its tech-heavy Cyber & Intelligence as technology continues to play a larger role in warfare. The group brought two new businesses under its umbrella in March, a nod to management's commitment to meeting changing customer needs. Cyber & Intelligence is responsible for just a fraction of BAE's total revenue right now, but could become a much more vital growth engine moving forward.

Cash flow has historically been a thorn in BAE's side, but we were pleasantly surprised to see continued progress with another increase this year. Working capital management coupled with strong profits means this is the second year running that cashflow is in the black.

BAE's position as a critical defence supplier should continue to hold it in good stead. Reliable revenue streams are a very enviable asset in the current environment, and we also note the valuation isn't too demanding. The group's in good shape to deliver on its long-term growth strategy.

BAE key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

The author holds shares in BAE plc.

Full Year Results (underlying, constant currency)

Sales increased 5% to £4.5bn in Electronic Systems, helped by growth in Electronic Combat Solutions and Precision Strike & Sensing Solutions. The pandemic continued to depress commercial revenue. The integration of acquisitions made in 2020 helped boost return on sales by 2.3 percentage points to 17.1%. The orderbook grew from £5.3bn to £5.7bn as the group secured new F-35, Precision Strike and C4ISR contracts.

Higher combat vehicle deliveries and CV90 tank upgrades helped Platform & Services sales rise 3% to £3.4bn. Easing pandemic-related disruptions and more efficient Combat Mission Systems and Ship Repair businesses helped profits rise from £190m to £259m. The orderbook shrunk by £300m to £5.3bn.

Air reported sales of £8.3bn, up 6%. This was driven by fighter jet support services as well as a ramp up in production on Qatar contracts and the start of production on Germany's 38 aircraft order. Return on sales declined from 11.5% to 10.3% , reflecting increased research and development spend as well as a higher proportion of more mature, lower margin projects. The orderbook was £1.8bn smaller than last year at £14.7bn.

Sales were up 5% to £3.4bn in Maritime, driven by continued ramp up of the Dreadnought submarine programme and the Type 26 naval ship business. Return on sales fell slightly from 8.6% to 8.4%. Dreadnought funding and UK Ministry of Defence contracts helped the orderbook expand from £8.5bn to £9.4bn.

Cyber & Intelligence sales were flat at £1.8bn as revenue lost from 2020's disposals was offset by growth in the government and defence businesses. Efficiency improvements and a strong performance from Applied Intelligence and Intelligence & Security helped return on sales rise from 7.5% to 8.9%. Demand outpaced supply in the government and defence business, but the overall orderbook was slightly smaller at £1.0bn.

Free cash flow rose to £1.9bn from £1.4bn last year, reflecting higher profits and collections ahead of schedule. This fed into a £558m decline in net debt to £2.2bn.

Find out more about BAE Systems shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 24th February 2022